‘How BoI’s risk management strategy aided loan recovery’
Dr. Ezekiel Oseni is the Chief Risk Officer of the Bank of Industry. In this interview with FEMI ADEKOYA, he explained how the bank was able to re-engineer its processes through an Enterprise Risk Management framework to reduce its non-performing loans and also increase intervention to industrial firms and small businesses.
Lending is a risky enterprise. How risky is it to lend to Nigerian businesses?
Somebody said you cannot run away from lending. Every business has its own risks. Lending is risky and when you look at the Nigerian environment, you will give credit to entrepreneurs. I look at limiting factors and I know it is quite difficult to do business in Nigeria. Talk of cost of production and others. It is risky but if you must develop, you must develop the industrial sector at either the micro, small and medium levels. So how can you support them? They do not have access to funds from commercial banks and where they do, the interest rate is just too high for them that they cannot pay.
BoI is filling the gap, making funds easily accessible to them at a much lower rate. Looking at the risk, there are businesses that are doing well. They may not want to pay you back because they think you are taking money from the government. That is a risk on its own. There are other businesses that want to pay back but things are not just working for them. That is also a risk. There are also those that things are not working well for and they do not want to pay back. I think this is a complicated risk. How do you then manage them? For those having difficult times in terms of cost of production or not meeting their projections, we talk with them and advise them on what to do. And most times, when they take our advice, they get out of the wood.
If we need to restructure the facility and give them more time, we will know and give them every support they need. But for those customers doing well but feel this is government’s money and do not want to pay, that is a risk. But we mitigate the risks by ensuring that before we give out loans, we ensure adequate collaterals are provided. When it is obvious you have the capacity to pay and your business is doing well but you do not want to pay, then we do what the lender and the borrower agreed; that is, we fall on the pledged assets and recover the money.
Are you not aware that some real sector players may not be able to pay back owing to Nigeria’s difficult business environment? This trend is noticeable among borrowers from your Cotton, Textile and Garment (CTG) Fund.
Yes, I know. There are things that are beyond the companies. Look at the cost of generating power. A company may run its generating plant for 24 hours. By the time you push the product into the market, you find out you cannot compete with importers. I am sure the bank management has engaged the proper authorities to see how this situation can be addressed, especially where local producers cannot compete effectively with importers. When you look at goods that are produced locally, you find out they are of better quality than imported ones. It is just that prices may be higher. Ordinarily, any buyer wants to go for a lower price and this is detrimental to the economy.
There have been complaints from manufacturers in the SME category that they are not adequately funded by the BoI. How do you intend to expand the net and ensure they get more funding?
I agree with you that SMEs are not having enough funding as they ought to. But the bank is doing everything possible to reach out to them. You may remember that some years ago, we decided that instead of just doing SMEs and large enterprises, we incorporated the micro segment. That is how we came into corporative societies and said ‘let people come together in a group of 8 or 10, let them do a kind of cross guarantees; that is, I guarantee you and you guarantee me (without any collateral) and you can have access to the fund. That is one way of ensuring that people have access to funds from the BoI. Another thing the bank did not quite long ago is the introduction of the Cottage Agro Processing (CAP) Fund and this one too does not require you to provide collaterals or go to another bank to ask for guarantees. All you need is someone who is credible that stand as your guarantor.
What is your assessment of BoI’s risk management framework?
In 2013, the management approved that we should conduct the Enterprise Risk Management Framework Design. That was done. The essence of this was to determine where we were with respect to expertise. The firm we engaged to do this later came up with the ERM framework, which was also approved by the board.
One of the things we have done is that we have strengthened the bank’s risk management profile. The risk management division has six other departments which was not the practice before. We have the credit control department which reviews all credit in loan disbursements; the credit administration unit that does the booking and ensures that records are kept; and the credit monitoring department which monitors the loan on day-to-day basis. We also have the credit compliance department, the loan recovery unit and the non-order credit risk department which handles all other risks which are not credit risks, such as operational, technological, reputational and other risks.
So how would you rate the bank in terms of risk management?
We have really improved. To measure performance, we often use the Non-Performing Loans (NPLs) ratio. As of December 31, 2013, our NPLs ratio was 12.98 percent. But by the end of December 2014, the ratio improved to 5.81 percent and that is more than 100 percent. As of the end of March 2015, the NPL ratio had come down to 4.09 percent. We actually have a target of ensuring that our NPL does not go beyond 3 percent. That is the global best practice. When you compare us with other development finance institutions (DFIs) in Africa, we are far, far ahead.
How was the bank able to reduce its NPLs to this level?
The first thing we did was to implement the Enterprise Risk Management Framework. Our staffing was improved. We now have more staff and quality staff members. Two, our credit department became more active, and we have a loan recovery department that is very active. Loan defaulters now know that things have really changed. So they know they have to pay us and a number of them have been trying to pay us.
Is it right to say that your NPLs came down because your lending rate reduced?
No, we have not stopped lending. In fact, lending makes NPLs ratios come down. If you lend, NPL will always come down. We now have a quality risk management system; our lending is quality and our recovery has improved. So a lot of measures have been put in place to checkmate those loopholes. You may remember that some time ago, the bank launched the Hall of Fame and the Hall of Shame. That sent a lot of message to loan defaulters.
Can you give an assessment of the bank’s loan recovery profile within the last 12 months?
We have done very well. If you compare us with DFIs in Africa, you will see we are on top of the world. Our loan recovery by the end of in 2014 was N2.5 billion. Between the time the Hall of Fame and Hall of Shame was launched, that is, between the last quarter of 2014 (Q4 2014) and the first quarter of 2015 (Q1 2015), we have recovered N1.3 billion.
From January to March 2015, we have recovered N403 million. Our target is to bring our NPL ratio to 3 percent. And for us to achieve that, we need to ensure NPLs are recovered. Our loan recovery target for every quarter is N600 million, which translates to N2.4 billion annually. We have automated a lot of our processes so as to have little human interference and reduce errors that can happen.
Does your A- rating by Agusto &Co have anything to do with good risk management practices?
Yes, this was the first time the bank would be rated. And apart from African Finance Corporation, this is the first time any DFI in Nigeria is rated. BoI went for the rating because of our desire to be the best Factors that are considered in this kind of rating are the financials, the risk management and the corporate governance. This is good for the bank.
Shouldn’t it have been A+?
We even wanted AAA, but you see, there is always room for improvement. We are already talking with an international rating firm to come and rate us too. We have done it locally and we also want to do it internationally to know where to improve. The first thing is that BoI is first to be rated and we will retain our excellence.
Does BoI have the capacity to go into areas of intervention other than just funding plants and machineries, or does the bank need more support or capacity?
In the last two months, almost everybody in the bank has gone through the risk management training. There are also other trainings that require the staff to have a quality risk access to do proper risk monitoring. Many of us, not just the management but up to the lower cadre, have gone through the trainings. Where we do not have the capacity, the management always has a way of engaging with organisations that can provide the capacity to come and do so.